The Effect of Introducing Foreign Strategic Investors on Bank Prudence: Does One Size Fit All?

Abstract

This paper investigates this question based on relevant data from China’s commercial banks over the period from 1995 to 2010. Three main results emerge from this study. First, introducing foreign strategic investors increases the ratio of total equity to total assets and the ratio of total equity to gross loans, and reduces the ratio of gross loans to total assets and the ratio of gross loans to total customer deposits in the short term. Second, introducing foreign strategic investors reduces the ratio of total equity to total assets and the ratio of total equity to gross loans, and increases the ratio of gross loans to total assets and the ratio of gross loans to total customer deposits in the long term. Third, we find that the effects of introducing foreign strategic investors on bank prudence are significantly different in between state-owned and joint-stock commercial banks and city commercial banks. The effects of introducing foreign strategic investors on all measures for bank prudence in state-owned and joint-stock commercial banks are significant in both the short term and the long term, which are consistent to our main results. But the effects of introducing foreign strategic investors on bank prudence in city commercial banks are not significant in many measures for bank prudence in both the short term and the long term. In the further analyses, we also find that the effects of introducing foreign strategic investors on bank prudence (except the ratio of gross loans to total customer deposits) are stronger in stated-owned and joint-stock commercial banks than that in city commercial banks in the short term; the effects of introducing foreign strategic investors on bank prudence (except the ratio of total equity to total assets) are stronger in stated-owned and joint-stock commercial banks than that in city commercial banks in the long term. This research not only presents empirical evidence for introducing foreign strategic investors but also provides practical suggestions for further reforms in the Chinese banking industry.